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“Higher Taxes In a High Tax State Are Highly Problematic”

Thomson Reuters Tax & Accounting Blog05/03/17 David Brunori

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Connecticut is a high tax state. Just check the U.S. Census data and you will see it has among the highest state tax burdens in the country. But high tax burdens have a decidedly negative effect on economic development. Both the Tax Foundation and the American Legislative Exchange Council rank Connecticut in the bottom ten. Throughout the country we have seen a long term migration of people and businesses from high tax states to lower tax states. If this is all true, and I believe that it is, would a Connecticut politician actually want to raise taxes?

The answer is yes. Legislators want to increase the top personal income tax rate to 7.49 percent from 6.99 percent. Dead people will pay more as they want to increase the estate tax from 6.7 percent to 7.49 percent. Not ignoring poor folks, the political leaders want to increase the sales taxes to 6.99 percent from 6.35 percent. Homeowners will take a hit as the elected leaders want to allow municipalities to tax property at 100 percent of assessed value. Municipalities can currently charge at an assessed value of 70 percent. There are also proposals for soda taxes, bag taxes, and increased bottle taxes. You might wonder like me, what is wrong with these people?

There have been no proposals of which I am aware to directly raise business entity taxes. Maybe they learned a lesson from GE. But who do they think will pay all these new taxes? The owners, employees, and customers of Connecticut businesses will. If you have the highest tax burdens in the country and still run deficits, you are doing something wrong.

We Love Grandma, But Not This Much

Maine is full of bad tax ideas. The latest is L.D. 16 which will exempt all income from tax for folks over 70. I will say this for the thousandth time. Your base should be broad and rates low. Other than the fact that we love grandma, admire the guys who stormed Normandy Beach, and seniors vote, there is no reason in the world to have a blanket tax exemption by age. If Warren Buffett moves to Maine and retires he would be exempt from tax. If you want to help poor grandma or grandpa, go ahead. But helping all old people, whether they need it or not, is silly.

Good But Not Bold

Nebraska is considering a tax reform effort that by all measures is very good. The proposal, L.B. 461, will reduce the number of brackets from four to three, lower the top personal income tax rate from 6.84 to 5.99 percent, and cut the corporate tax rate from 7.81 to 5.99 percent. The tax cuts will be tied to revenue triggers – a very good idea. The reforms will also provide property tax relief to farmers by moving from a market valuation system to what appears to be a use valuation.

My friends at the Tax Foundation are applauding these reforms. And they should. Lower rates tied to triggers are a sound and responsible way to proceed. But this measure is hardly revolutionary. The fundamental structure of the Nebraska tax law will not change. The dumb things the state does like handing out incentives and taxing business inputs won’t change. But yes, it’s good. It’s just not as good as it could have been. For example, the corporate income tax is a fundamentally bad tax that increasingly falls on workers in the form of lower wages. Getting rid of that albatross would be true reform.

Speaking of Nebraska …and Colorado

Nebraska legislators are considering a proposal to require remote vendors to report sales to the state. The new law is modeled after that in Colorado. The proposal would require vendors with more than $100,000 of sales into the state to notify customers of their use tax obligations and notify the state of the sales. The goal is to get people to pay their taxes. Curiously, Colorado is thinking about repealing its notice requirements. A proposal that is expected to pass (S.B. 238), would repeal the notice requirement to the state, but retain the requirement of notifying the customers of their use tax obligations.

Oh, Why Not?

Tennessee has adopted a law that allows manufacturers to elect to use a single sales factor apportionment formula. Let’s face it, all the cool states are moving to single sales factor, so why not. The beautiful thing is that the law allows an election just in case the single sales factor does not provide the near zero tax burden that it does for most manufacturers.

Interestingly, though, Tennessee corporations have a gripe. The state relies more heavily on corporate income as a percentage of revenue than any other state, except for maybe New Hampshire and Alaska. I don’t blame them for trying to lower the burdens.

Trivia

This legend reportedly wrote a song after receiving his first paycheck and noticing how much tax was withheld. The chorus is below; the first person who names him gets a state tax policy book! It’s perfect for anniversaries and Bar Mitzvahs: